Virus Impact Clobbers Wall Street, Driving Down Stocks

MANHATTAN (CN) — Markets fell on Tuesday, curtailing Wall Street’s hopes to build off large gains that had started the week.

By the closing bell on Tuesday, the Dow Jones Industrial Average lost nearly 400 points after gaining 459 points the day before. The S&P 500 also fell, by 1%, and the Nasdaq moved backward as well, losing 0.8% for the day. 

Even a record number of 6.5 million workers hired in May failed to spur investors into positive territory. The partial bounce-back for jobs, according to data released Tuesday by the Labor Department, is the largest monthly gain in hiring since the government began tracking the numbers in 2000.

Calming words by the central bank’s second-in-command about the relative strength of the U.S. financial system also failed to buoy investors.

In a midday speech before the Exchequer Club in Washington, D.C., Federal Reserve Vice Chair Randal Quarles said the banking system is better prepared for the Covid-19 pandemic than it was for the Great Recession, with many banks doubling their capital ratios to 14% since 2011. 

“There’s a lot of uncertainty about the future evolution of the world,” Quarles said during the question-and-answer portion of the webcast. However, he noted he does not expect a “material increase” in banking failures over the next couple years. “In my view, at least, it is premature to say we should be expecting that,” he said.

Contending that many banks may no longer be “too big to fail,” Quarles noted that bailouts are not a sure thing. “Investors increasingly expect failing banks to be resolved rather than bailed out,” he said. “Market prices suggest that investors are now pricing the risk of having losses imposed on them in the event of a bank failure.”

Quarles credited the Financial Stability Board, an international body that monitors financial systems, with helping to craft new liquidity and capital standards. “We are moving to a world in which [global systemically important banks] can be global in life and orderly in death,” Quarles said.

Economists with the Federal Reserve Bank of New York found that banking reserves have increased by $1.5 trillion since mid-March — a more abrupt increase than during the 2008-09 economic crisis — and that systemically important banks around the world have absorbed the lion’s share of those reserves.

Many banks and financial institutions are expected to release earnings next week, so it remains to be seen just how lively those institutions remain.

Abroad, bad news repressed bullish investors. The European Union economy will contract by more than 8.7% this year, then grow 5.8% in 2021, according to a summer economic forecast released Tuesday by the European Commission. 

The updated forecast is worse than a similar prediction in May, which had the continent’s GDP shrinking by 7.5% and increasing by 6% in 2021. The worsening outlook is due to “the highly asymmetrical nature of the impact across countries and industries,” as well as the longer lockdown period than initially expected.

The news did not help European markets, which fell across the board. Markets in Germany and France dropped nearly 1% each, while the pan-European Stoxx 600 lost 0.6%.

“The road to recovery is still paved with uncertainty,” EU Economy Commissioner Paolo Gentiloni tweeted after the report was released. Gentiloni has urged the member countries to adopt a new 750-billion-euro stimulus package, made up of grants and loans, calling it a “turning point to face an unprecedented crisis.” 

Investors also may have to prepare for more bad health-related news in coming weeks. “I don’t think it should be a surprise if the deaths start to rise again,” said Dr. Mike Ryan, executive director of the World Health Organization’s emergencies program during the group’s daily press briefing. “It will be very unfortunate, but it may happen.”

More than 11.6 million people have been infected by Covid-19 worldwide, while about 540,000 have died, according to data compiled by Johns Hopkins University. In the United States, nearly 2.9 million people have contracted Covid-19, while more than 130,000 have died.

Crucially, coronavirus-related deaths in the United States have dropped in recent weeks, though that number may again rise since spikes in such deaths came a month after spikes in reported cases. 

Follow @NickRummell

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